Ben Phillips,the centre’s principal research fellow,believes that a future government will have to adjust tax thresholds because the burden of tax continues to grow despite the stage 3 cuts.
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Based on his research,without any future cuts,the average tax rate on the top 20 per cent of taxpayers will have hit a record 25.8 per cent by 2033.
In percentage terms,the hardest hit if tax thresholds remain the same will be low- and middle-income earners. A household in the bottom 20 per cent of income earners faces a 42 per cent lift in their average tax rate,while someone earning around $155,000 by 2033 would have suffered a near-12 per cent increase in their tax hit.
Phillips said governments of all political persuasions had developed a habit of giving back bracket creep to taxpayers. Stage 3 was no different.
“Over the past 40 years,you see a change in the tax rates every couple of years. It’s billed as a great tax cut but it’s really just giving back bracket creep,” he said.
“I don’t believe there won’t be any more tax cuts before 2033. Every way you look at it,there has to be at least another round of tax cuts.”
While the stage 3 tax cuts at $23 billion are the largest on record in nominal dollar terms,as a share of GDP,at 0.8 per cent,they pale against others. John Howard’s tax cuts,to cover the impact of the introduction of the GST,were worth 1.7 per cent of GDP.
Paul Keating’s reforms of the mid-1980s,that included cutting the then top marginal rate of 60 per cent while introducing a capital gains tax,dividend imputation and the fringe benefits tax,were marginally smaller at 1.6 per cent of GDP.
Economist Richard Holden,from the UNSW Business School,believes the country needs a major overhaul of its entire tax system,describing the stage 3 cuts as nothing more than returning bracket creep.
He said tax thresholds should be indexed so people were not burdened by ever-increasing average tax rates,while the GST system should be radically overhauled.
An absence of real tax reform is holding back the economy,according to Richard Holden.Credit:Alex Ellinghausen
Holden believes the GST should be increased to 15 per cent with all taxpayers given a set cheque every month up to a value of $10,000 or $12,000 a year that they could spend on anything.
This would enable deep personal income tax cuts and swing the focus of tax collections to consumption.
“Compared to our overseas peers,we’re half as dependent on taxes on consumption and about twice as dependent on taxes on workers,” he said.
“We have a situation where we depend on the workforce to pay for all of the social programs that we want.”
Holden said the tax system affected incentives to enter workforce,particularly those on lower incomes who faced high effective marginal tax rates,and distorted the economy.
“We have falling birth rates and so we’re more dependent on immigration to provide the workforce that we need,” he said.
“That has a distortionary effect through the entire economy,starting with the housing market.”
Another issue around the stage 3 tax cuts is their impact on general economic activity. The package was put together before the COVID-19 pandemic and well ahead of the huge government and central bank stimulus that has fed into current inflationary pressures.
Economist Jo Masters believes the tax cuts may come in at the right time to stabilise the economy.Credit:Louie Douvis
Barrenjoey Capital Partners chief economist Jo Masters does not believe the tax cuts will unleash a wave of inflation.
“People have been talking about these tax cuts like it’s $23 billion all at once. It’s going to take two or three or four months until people really see them. I don’t think we’ll really know how they’ve played out until the end of the year,” she said.
“Depending on how much is saved,we could see about $4 billion spent out of the tax cuts. In a year of household spending worth $1.5 trillion,it doesn’t really move the dial.”
Masters said many people were stuffing any extra cash away in their redraw mortgage accounts rather than spending it.
She noted there’s a large difference between the stage 3 tax cuts and the $1500 low- and middle-income tax offset that was effectively a lump sum payment to many Australians,while the economic situation at present – with growth at just 0.1 per cent through the March quarter – was also very different.
“The economy is rolling over. Population growth,GDP,wages,inflation,household consumption have all rolled over. So it’s probably fortuitous that they’ve come in when they have,” she said.
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